Turkey Country Report Oct19 - October, 2019

October 16, 2019

Erdogan’s in action again. While we’re concluding this report Turkish jets were bombing Kurds in northern Syria.

Risks are huge as usual and there is again bipartisan fury in the US Congress.

However, the inexplicably strong personal bond between Erdogan and Trump remains.

Erdogan is in big trouble at home. His power is dramatically sliding following the Istanbul revote on June 23.

He has hopes some Kurd killings will help him retrieve some power and Europe will give him billions of dollars aid to build homes for immigrants on the lands he would invade in Syria.

Turkey’s next elections are not scheduled until 2023 but we had a bet, following the Istanbul revote, that it will not pass longer than one year until the next elections. We remain stuck to it.

Official data and Erdogan’s propaganda machine, which also dominates mainstream global news services and analysts for a while, have been suggesting somehow turning from the dip but no-one should be convinced that any kind of recovery is at hand before getting through the upcoming winter.

Turks are getting mad and buying more and more dollars when they see on media reports that inflation fell to single digits and the economy is growing.

In order to overcome his economic troubles, Erdogan is trying to employ his trademark economy policy, namely stimulating the economy by turning on the credit taps, but such is the wretchedness out there by now that private lenders are dragging their feet over extending new loans and domestic confidence in the government is pretty much at rock bottom.

Concerns are still there about whether there will be an overshoot of monetary policy, and a renewed depreciation in the currency.

However, public lenders have so far managed to defend the local currency at the cost of burning huge amounts of central bank reserves while The Dude makes the equity market.

Domestic borrowing market is almost idle following a series of huge muffs since last year while external borrowing channels are also not promising.

The Erdogan administration has not come yet to the page of zombie companies and hidden NPLs at bank balance sheets from spending energy on manipulating realities.

Living dead companies are seen to weigh on his plan to turn on credit taps to stimulate the collapsed economy.

As a solution to the NPLs problem, Erdogan says “now time to pay up” to banks but banks are dragging their feet. Since 2016, banks are carrying the Turkish economy.

OECD cut its GDP contraction forecast for Turkish economy this year to 0.3% from a previous 2.6% released in May.

IMF raised its forecast from -2.5% to 0.25% but at the same time said of the country’s post-currency crisis financial markets that the “the current calm appears fragile”.

In a report released after the annual visit to Turkey paid by its staff, the IMF cited anxieties about bad debts in the country’s corporate sector, low foreign currency reserves and heavy reliance on foreign financing, as well as a new problem, namely a growing fiscal deficit.

“Growth has rebounded, aided by policy stimulus and favourable market conditions, following the sharp lira depreciation and associated recession in late-2018,” the IMF said. “The lira has recovered and the current account has seen a remarkable adjustment.”

However, the institution said Turkey “remains susceptible to external and domestic risks” while “prospects for strong, sustainable, medium-term growth look challenging without further reforms”.

The IMF also took the view that the central bank’s decision to slash rates by 750 bp since July was “too aggressive”. It further advised that the reduction made in reserve requirements for banks that meet certain lending targets “should be revisited”.

Attempts to expand lending, the IMF said, “should be limited and should also ensure that resulting credit is provided only to viable borrowers”.

The IMF also remarked that additional steps to clean up bank and corporate balance sheets would support financial stability and stronger and more resilient growth over the medium term.

Banking watchdog recently told lenders to write off Turkish lira (TRY) 46bn ($8.1bn) of loans by the end of the year and provision for loss reserves, in a move targeted mostly at the hard-hit energy and construction sectors.

Fitch said its stress test showed that loss-absorption capacity is solid at Akbank and Garanti, moderate at Yapi Kredi Bank, QNB Finansbank and Isbank and generally more modest at Ziraat and Vakifbank.

Halkbank's stressed metrics are the weakest and fall below minimum requirements in all stress scenarios.

According to Fitch, the lenders may seek to raise new capital either from the market or from shareholders to mitigate solvency risks in the event of significant asset quality deterioration.

“Capital injections could come from the Turkish authorities, or state-related entities, for the three state banks, foreign shareholders for the three foreign owned banks, and domestic shareholders for Akbank and Isbank.”

Kicking start of the autumn season for syndicated loan renewals, Akbank renewed syndicated loan at 83% roll-over ratio.

National flag carrier Turkish Airlines has received regulatory approval from the Capital Markets Board (SPK) to issue up to $2bn worth of eurobonds abroad.

No eurobond issues were seen since July.

Banks and corporates are trying their chance with domestic bonds. Turk Telekom bid to issue domestic papers worth up to billion lira. Isbank sold 350mn lira of 10-year domestic subordinated bonds. Energy firm Zorlu Enerji has, meanwhile, won permission to sell up to TRY600mn of domestic bonds to qualified investors.

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